THE WANDERING TAX PRO
Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Friday, August 28, 2015

“At
the company's instigation, the Senate Appropriations Committee has passed a
funding bill covering the IRS whose accompanying report instructs the agency to
at least quadruple the length of the
form that taxpayers fill out to get the Earned Income Tax Credit.”

Of course, IMHO the Earned Income Tax
Credit does not belong on the 1040.

And, also IMHO, nobody should ever use Henry and Richard to prepare their tax returns.

Over the years, when the stock market
“corrects”, clients and friends have told me things like “I lost $100,000
today!”.But did they really?If the value of their portfolio was $500,000
before a correction, and is $400,000 after the correction, but they actually
paid $300,000 to purchase the stock in their portfolio, or contributed $300,000
to the pension plan, they have not lost a penny.They are still ahead $100,000!

* Attention Tax Professionals - here is a
great tool for use in your practice.Click here for more information.

I discussed in detail the tax deduction for
fostering a service dog in my 2009 post “Doggie Deductions”.

FYI, National Cat Day is Thursday, October
29.

* After a bit of a hiatus we welcome Trish
McIntire of OUR TAXING TIMES back to posting.

She brings us “Back to School”, which
provides a good list of what records you should keep to document education expenses
for the variety of education tax benefits, and tells us about the “Kansas Tax Amnesty 2015”.

“Finance
website WalletHub's recent survey of the 150 largest cities in the U.S. found
Jersey City and Newark to be the two worst cities to retire in America. The
report took into consideration each city's affordability, the availability of
senior activities, quality of life (including crime rates and weather) and
healthcare.

Coming
in at No. 149 overall, Jersey City barely edged out Newark by ranking 141st in
affordability, 140th in activities, 108th in quality of life and 149th in
healthcare.”

THE LAST WORD –

In an unscientific test of morals, Honest
Tea went to the 27 largest cities across the country and set up stands, selling
tea for $1. People were supposed to put a dollar in a box and take a bottle of
tea, all on an honor system.

Atlanta was the most honest city – with
100% of those taking a bottle paying the $1.00.

Guess which city was the only one where people actually took money from the box.Washington DC!No surprise here.

Thursday, August 27, 2015

My fellow tax blogger Kelly Phillips Erb –
FORBES.COM’s TaxGirl, has a regular feature called “Fix the Tax Code
Friday”. She poses a tax question that concerns a
problem with the current mucking fess that is out Tax Code and calls for
comments from her readers.

A recent question was -

“If we scrapped all
of the deductions under the Tax Code except one, which one would you want to
hold onto?”

My answer -

I would keep many of the current
deductions, although none of the current credits (FYI – click here
for my series of TWTP posts on how I would rewrite the Tax Code).
Specifically I support keeping the deduction for state and local income taxes,
and real estate taxes and “acquisition debt” mortgage interest on a principal
personal residence (owner-occupied housing). But my reason is notto encourage
home ownership.

Here is how I explained my reasoning in a
post at THE WANDERING TAX PRO back in 2013 -

The Internal Revenue Code taxes Americans
based on income measured in pure dollars. However it is a fact that the “value”
of one’s level of income differs, sometimes greatly, based on one’s
geographical location. A family living in the northeast or California that has
an income of $100,000-200,000 (apparently considered “upper-income taxpayers”)
may be just getting by, while a similar family that resides in “middle America”
lives like royalty on the same level of income. Many components of the Tax Code
are indexed for inflation, but nothing is indexed for geography. To be honest I
have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for
example, New York, certainly New Jersey, Connecticut, Massachusetts, and
California. State and local income and property taxes are the highest in the
country. The cost of real estate is also excessively high. As a result one must
earn a lot more money to be able to live in these states – and salaries are
arbitrarily increased to reflect the increased cost of living. Yet $150,000 in
income is taxed by the federal government at the same rate in New York City as
it is in Hope, Arkansas.

Real estate and state and local income
taxes and the cost of a home, and therefore also the amount of “acquisition
debt” mortgage interest paid on a residence, are higher in the Northeast, and
California. Since we pay taxes on “net income” after deductions, allowing an
itemized deduction for these items would help to somewhat geographically
“equalize” the tax burden.

I do believe that the itemized deduction
for real estate taxes and mortgage interest on secondary personal residences
and the itemized deduction for “home equity” mortgage interest (not used for
“substantial” home improvement) should be eliminated.

I have two questions for my readers
(especially the tax professionals) –

First – how would you
answer Kelly’s “Fix the Tax Code Friday” question?

And second – what do
you think about my suggestion, and the issue of “geographical equalization” in
general?

Tuesday, August 25, 2015

The summer
is almost over – and year-end tax planning time will soon be here.

Just thought
I would provide some 1040-related reminders –

MORTGAGE
INTEREST

Basically
there are two types of mortgage debt –

1)
Acquisition debt - debt acquired after October 13, 1987, that was used to buy,
build, or substantially improve a main residence or a qualified second home. A
“substantial improvement” is one that adds value to the home, prolongs the
home’s useful life, or adapts the home to new uses.And

2) Home
equity debt – debt acquired after October 13, 1987, that is secured by a main
residence or a qualified second home that is not used to buy, build, or
substantially improve the property.There is no restriction or limitation on what the money can be used for;
you can use it to buy a car, to pay for college, or to pay down credit card
balances.

You can
deduct interest on acquisition debt principal of up to $1 Million.But you
can only deduct interest on home equity debt principal of up to $100,000.When you
refinance a mortgage, or consolidate mortgage debts, any closing costs that are
added to the principal of the loan are considered to be home equity debt.

It is very important that you keep
good records of their separate acquisition debt and home equity debt so that
the correct amount of mortgage interest is claimed on Schedule A.

ALTERNATIVE MINIMUM TAX

Speaking of home equity interest - in
calculating the dreaded Alternative Minimum Tax (AMT) only interest on
acquisition debt – mortgage loan proceeds used to buy, build, or substantially
improve a primary and one secondary residence - is deductible.Interest on home equity debt is not deductible.

It is very important that you keep
good records of their separate acquisition debt and home equity debt so that
the correct amount of mortgage interest is claimed on Form 6251.

You
can deduct mandatory employee contributions to a state unemployment (SUI),
disability (SDI), and/or family leave fund (FLI) which are withheld from your
paycheck, as is the practice in Alaska, California, New Jersey, New York,
Pennsylvania, Rhode Island, and Washington, as state income tax on Schedule
A.

The
amount of the withholding is usually reported on your W-2 in Box 14.If not you can find the amount on your
year-end cumulative paystub.

I
deduct these withholdings as “other tax” on Line 8 of Schedule A to separately
identify them.

If
you elect to deduct state and local sales tax instead of state and local income
tax you cannot deduct these
withholdings.

CHARITABLE
CONTRIBUTIONS

If
the total amount donated to a church or charity is more than $250.00 you must have a “contemporaneous” written
acknowledgement from the organization with its name and address, the date of
the contribution, and the amount donated.

To
be able to claim a deduction for the full amount of your contribution the
acknowledgement must state “No
goods or services were provided in exchange for the donation”.It is very important that this statement is
included on your receipt or acknowledgement.And the receipt or acknowledgement must
be received from the church or charity before
the earlier of the date the original tax return is filed or the extended due
date of the tax return.

{FYI
– my DOLLAR STORE also has a “Charitable Contributions Guide” with
worksheets.Order any 2 guides from the
Dollar Store by September 15th and receive “Surfing USA” free!}

BUSINESS
TRAVEL

If
you use your car for business you must
keep “contemporaneous” records of your business mileage. This means that you
should record the information on the day the trip occurs.Record each individual business trip
separately. Enter the date, location, business purpose and miles driven for
each trip in some kind of diary, account book, or expense log. If you do not
have EZ Pass you should also note any toll expenses. If you do have EZ Pass,
you can identify tolls for business trips on the monthly statement.

I use
a pocket date book as my travel log.I also
enter in my travel log the quarter I put in the parking meter while visiting a client.

{You
guessed it – the DOLLAR STORE also has a “Business Expense Guide”.}

“Only
about 48 percent of parents are saving to pay for their children's tuition, but
we believe that number can (and should) increase significantly. With the help
of two leading college savings experts, we created this guide to help parents
and students better understand 529 plans and other college savings strategies.
Key elements of the guide include:

- An in-depth look at what 529 plans are and
how they work,

- An extensive comparison of 529 and other
savings plans,

- A list of savings tips and tricks from the
experts.”

* Here is the word on the Homestead Benefit
(formerly the Homestead Rebate) from the New Jersey Division of Taxation -

“The
Division of Taxation has begun mailing applications for the 2013 Homestead
Benefit.Applications are being mailed
to homeowners over the next three weeks according to the schedule below. The
deadline for filing is Friday, Oct. 30, 2015.

The
Homestead Benefit application delivery dates by county are:

Gloucester,
Mercer, Middlesex, Passaic - Aug. 25

Camden,
Hudson, Hunterdon, Salem, Somerset - Aug. 28

Bergen,
Burlington, Cumberland, Warren - Aug. 31

Morris,
Ocean - Sept. 3

Atlantic,
Essex, Monmouth, Sussex - Sept. 5

Cape
May, Union - Sept. 9

Most
homeowners will receive their 2013 benefit payment as a credit on a future
property tax bill. They can expect to receive a property tax bill or advice
copy from their tax collector reflecting the amount of the benefit.Homeowners who indicated when filing that
they no longer own the property or those whose principal residence was a unit
in a co-op or continuing care retirement community will receive their benefit
by check (or direct deposit).”

THE LAST WORD -

The circus that is
the Trump Presidential campaign reminds me of a number from the musical CHICAGO
– “Give em the Old Razzle Dazzle”.

Billy Flynn tells
Roxie Hart –

“It's all a circus, kid. A three ring
circus.These trials- the whole world-
all show business.”

In the song that
follows Billy goes on to say –

“What if your hinges all are rusting?What if, in fact, you're just
disgusting?Razzle dazzle 'em and
they'll never catch wise!”

And –

“Long as you keep 'em way off balance, how can
they spot you've got no talents?Razzle
Dazzle 'em.”

It is no surprise to anyone who lives, or
lived, in the “Garden State” that it is #1 on the list.“New
Jersey has the highest effective rate at 2.38%”.NJ is “followed
closely by Illinois (2.32%), New Hampshire (2.15%), and Connecticut (1.98%)”.

The item also points out that New Jersey “impose{s} high property taxes alongside high rates in the other major tax
categories.”

“Hawaii
has the lowest effective rate at 0.28%, and is followed closely by Alabama
(0.43%), Louisiana (0.51%), and Delaware (0.55%).”

“But
under a special rule called domestic production activities deduction (DPAD),
you can deduct 9% of your qualified domestic production activities income
(after taking into account certain allocable costs).

This
write-off is also called the Sec. 199 deduction and it’s on top of deductions
you’ve already taken to generate the income. In effect, you get to double dip
in tax breaks.”

Friday, August 14, 2015

"The
following jurisdictions are conducting tax amnesty programs. During the
designated amnesty period, taxpayers have a chance to pay back taxes with
reduced (or eliminated) penalty and/or interest. For more information,
including eligibility requirements, or to obtain an application, visit the jurisdiction’s
website.

“P.L.
2015, c.73, signed into law on July 6, 2015, and effective immediately, amends
the New Jersey Gross Income Tax Act to increase the amount of the New Jersey
earned income tax credit from 20 percent of the federal earned income credit to
30 percent for tax years beginning on and after Jan. 1, 2015.”

FYI, it is my belief that the Earned Income
Credit does not belong on either the federal Form 1040 or the NJ-1040.

Jason feels that the IRS is already
regulating tax preparers via the PTIN program – and that is enough.

I do not support regulation of the tax
preparer industry by the IRS or any other government agency, and agree with
Jason that PTIN registration is sufficient.But I do support the establishment of a universally accepted independent
voluntary tax preparer credential – not to “regulate” tax professionals but to
provide a way to acknowledge their competence and currency and to help the
taxpayer public identify competent and current preparers.

* And Jason continues his tutorial on “Choosing
a Business Entity” with a review of the “Partnership”.

It appears that Trump does not just screw
his stockholders and lenders.He screws
everyone with whom he does business.

In the early 2000’s a long-time friend and
client purchased a condo in NYC for cash and owed a small amount to finalize
the deal.The Trump Organization was the
developer/builder.The money was due to
the financing bank.Of this payment 90%
would go to the bank and 10% would go to Trump.Trump’s lawyer told my client to write a check to the Trump Organization
and it would in turn pay the bank.

The bank did not want my client giving
anything to Trump – they wanted payment to go directly to them.The bank’s lawyer told my client that he did
not trust the Donald because he had reneged and screwed the bank multiple times
in the past.

My client told me -

“We
later learned that Trump always shorted his sub-contractors by 5 to 10% and
didn't care if they sued him.Ultimately
they would settle with him, taking a 5%+ haircut, and Trump always came out
ahead.”

Thursday, August 13, 2015

One
of the most frequently asked questions I get from clients and readers is “How
long should I keep my tax returns?”.

I
have always said you should keep the
paper copy of your tax returns (Form 1040 or 1040A, and corresponding state returns, plus all supporting Schedules, Forms, and worksheets) forever. This provides a permanent record
of your financial history. You never know when the information on a prior
year’s tax return will come in handy for a variety of tax or financial reasons,
or just to satisfy personal curiosity.

You
should also keep copies of all W-2s forever, and, as fellow tax blogger Russ
Fox of TAXABLE TALK has suggested, copies of proof of filing and proof of
mailing returns.

This
advice applies to tax professionals as well.As a tax preparer I am required by law to keep on file copies of tax
returns I have prepared for 3 years.But
I keep copies of every return I have prepared for all current clients.For some clients I have copies of their returns
going back to the early 1970s.

I
recently came across an excellent example of the benefit of keeping copies
forever.

A
long-time client inherited from my mentor, a lifelong NJ resident, is beginning
to take annual Required Minimum Distributions from his IRA accounts.The source of the monies in his IRA accounts
includes deductible contributions to Keogh and SEP accounts, eventually rolled
over into IRAs, deductible IRA contributions (during the 5 years in the 1980s
when everyone with earned income could contribute to an IRA regardless of the
amount of their Adjusted Gross Income) and rollovers of employer pension plans
partially funded by pre-tax employee contributions.

The
RMDs will be fully taxable on the federal Form 1040, as all of his contributions
to the various sources were either deductible or “pre-tax”.However his federally deductible
contributions to Keogh, SEP and IRA accounts were not deductible on the
NJ-1040, and are “after-tax” for NJ state income tax purposes.So he has a “basis” in his current IRA
accounts for NJ state tax, and part of his RMDs will be non-taxable return of
after-tax contributions on the NJ-1040.The
greater the total of employee after-tax contributions the greater the amount of
the RMD that will be tax-free to NJ.

I
have copies of this client’s tax returns going back to 1984, so I can add up
the amount of his federally deductible contributions to Keogh, SEP, and IRA
accounts from 1984 through his retirement in the late 2000s.However he was making contributions to these
accounts in years before 1984.

I
can guess the deductible IRA contributions (everyone with earned income could
make IRA contributions from 1982-1986 – so I can assume he made the maximum
contribution in 1982 and 1983 based on the fact that he did so in 1984-1986).But Keogh contributions are based on the
amount of net self-employment income, and I would need the actual returns from
before 1984 to get the correct numbers.

If
the client had kept copies of all his federal tax returns forever I could get
the needed information from him.

So,
in this case, information from tax returns going back to the late 1970s would
help reduce the tax liability on current state tax returns.

Tuesday, August 11, 2015

Sorry for the brief BUZZ installments
lately – but there is not much happening in the federal tax arena.

The idiots in Congress have left for
vacation without addressing the “tax extenders”.As I have said in a previous BUZZ it looks
like it will be déjà vu all over again as the idiots once again wait until the
last minute to extend these tax breaks for another year or two.

* Tax pros – Did you see the latest post at
THE TAX PROFESSIONAL yet?Why not?There are two questions I want you to answer.

“A
true flat tax would mean, as Dr. Carson explained, that everyone would pay the
same tax rate regardless of income.”

I don’t believe a person with higher income
should be punished for ambition and entrepreneurship by being taxed at a higher
rate.

The concept behind the “Fair Tax” – a
national sales tax – should not be dismissed out of hand.It has many advantages.Because it is a consumption tax paid at the
point of purchase those who currently avoid tax as part of the “underground
economy” would be paying tax, including, as former Governor Huckabee pointed
out at the debate, “illegals,
prostitutes, pimps, drug dealers, all the people who are freeloading off the
system”.

For years we have been telling you that the
IRS will never initiate contact with a taxpayer by telephone or email.They will always do it by postal mail.Scammers have been listening, and are now
sending out phony IRS balance due notices via postal mail.

Kay points out that “real letters from the IRS, even those about amounts the agency says you
owe, do not demand that you send it or its agents payments via specific methods
such as pre-debit cards. And initial written notices from the IRS also give you
time to respond to or rebut the agency's request for additional tax payment.”

For years I have also been telling you that
whenever you receive any correspondence
from the IRS or a state tax agency give it to your tax preparer
immediately.Do not send any money to
anyone without first checking with your tax pro.

If you have “self-prepared” your tax
returns, either by hand or via a “box”, and you receive correspondence from a
tax agency you should contact a tax professional before doing anything (you
should have used a tax pro instead of a “box” in the first place).Click here for a starting point in your
search for a tax pro.

Monday, August 10, 2015

The
National Society of Accountants (the “other” NSA) has developed a “Tax
Practitioners Bill of Rights” in response to continued IRS budget cuts and the
recent serious decline in IRS “customer service”.

Here
is NSA Tax Practitioners Bill of Rights:

1.THE RIGHT TO HAVE TAX LAWS AND RULES
PASSED IN A TIMELY MANNER, INCLUDING:

a.The right to have tax laws affecting
the current tax year enacted no later than September 1 of that year.

b. The right to have IRS forms reflecting any new tax
laws for the current year available no later than October 1 of that year.

2.THE RIGHT TO QUALITY SERVICE FROM
THE IRS, INCLUDING:

a.
The right to have telephone calls answered within 15 minutes, on a
practitioner-only hotline, staffed by competent/knowledgeable employees.

b.
The right to have taxpayer correspondence answered within 20 days.

c.
The right to have any collection action on the taxpayer’s account frozen while
the IRS is considering a taxpayer’s timely filed response to IRS collection
activity.

d.
The right to have one IRS representative deal with a tax issue from start to
finish until the issue is resolved.

e.
The right to request a supervisor be involved in resolving a matter if the
initiating IRS representative is unwilling or unable to resolve an issue.

f.
The right for practitioners with Practitioner Tax Identification Numbers
(PTINs) to communicate electronically with the IRS on taxpayer matters in a
secure manner.

3.
THE RIGHT TO PRACTICE WITHOUT UNDUE IRS DEMANDS DURING TAX FILING SEASON,
INCLUDING:

a.
The right to have an IRS audit moratorium during the three weeks immediately
before major tax deadlines such as March 15, April 15, September 15, October 15
of each year.

b.The right to have an IRS moratorium
on collection actions or collection information requests during the three weeks
immediately before major tax deadlines such as March 15, April 15, September
15, October 15 of each year.

c.The right to have an IRS moratorium
on planned software maintenance and computer downtime periods during the three
weeks immediately before major tax deadlines such as March 15, April 15,
September 15, October 15 of each year.

This
document addresses important issues that apply to taxpayers in general, and not
just tax professionals. Legislation is needed to guarantee the provisions of this document. However, I see the need not
for tax practitioner specific legislation, but for a “Taxpayer Bill of Rights”
legislation that includes all of the items discussed in the NSA document.

Since
2007, National Taxpayer Advocate Nina Olsen has been recommending that Congress
enact a Taxpayer Bill of Rights.The IRS
has already adopted a Taxpayer Bill of Rights (click here to download).

I
would include a provision that, except for a bill to address a specific natural
disaster, Congress could not pass “temporary” tax legislation.

We
need to merge the “Tax Practitioners Bill of Rights” and the “Taxpayer Bill of
Rights” into one document and provide an online petition open to all taxpayers
to sign.

Friday, August 7, 2015

There was not much discussion of taxes in
last night’s prime time Republican debate.Huckabee expressed his support for the Fair Tax plan, a tax on
consumption that would assure that "illegals, prostitutes, pimps, drug
dealers" pay their fair share of taxes too.Dr. Carson talked about a “tithe-based” 10%
flat tax.Under his plan a person making
$10 Billion would pay $1 Billion in tax and a person making $10.00 would pay
$1.00.I like the flat tax concept.It appears the consensus among the ten was
that the current Tax Code, called “convoluted” by one candidate, needs to be
rewritten.

“Individuals
who fail to file a 2014 tax return will not be eligible to receive advance
payments of the PTC in 2016. Individuals who are not eligible for advance
payment of the PTC will be responsible for the full cost of the monthly
premiums and all covered services. In addition, nonfilers may need to pay back
some or all of their 2014 advance payments.”

* Attention self-employed taxpayers – have
you taken advantage of my special summer offer yet? The cost of THE NEW SCHEDULE C NOTEBOOK is normally $7.95 – but for all orders postmarked by August 31st the
cost is only $5.30 – a 1/3 discount! The
report will be sent as a pdf email attachment.

Send your check or money order for $5.30,
payable to Taxes and Accounting, Inc, and your email address to –

SUMMER SPECIAL OFFER

TAXES AND ACCOUNTING, INC

POST OFFICE BOX A

HAWLEY NJ 18428

THE
FINAL WORD –

Tronald
Dump is truly a buffoon and a clown, which Jeb Bush denied calling him at last
night’s debate.

The
self-absorbed fool showed pride in the fact that he took advantage of bankruptcy
laws to screw his investors and lenders out of millions of dollars not once or
twice but four times.

He
also appeared proud of the fact that he contributed to many political
campaigns, of both Republicans and Democrats, not because he supported their
politics but solely so he would be able to call upon them for favors as needed
in the future.

When called
out for insulting women, and not just Rosie O’Donnell, as “fat pigs, dogs,
slobs, disgusting animals” and worse, Trump said he did not believe in being “politically
correct”.Calling women, or anyone, fat
pigs, dogs, slobs, disgusting animals and worse in response to criticism is not
“politically incorrect” – it is childish and inexcusable.If President Trump or the Unites States was
criticized or questioned by another world leader would his response be “You’re
ugly!”?

Trump’s
candidacy should not be taken seriously.It should be treated as the joke that it is.

SADLY I PARTICIPATED- BUT STILL ENDED UP WITH A TRUE INFERIOR IN THE WHITE HOUSE

DONALD T RUMP HAS NOT DONE A SINGLE THING THAT IS "APPROPRIATE" OR "ACCEPTABLE" FOR A CANDIDATE OR A PRESIDENT SINCE THROWING HIS HAT INTO THE RING.EVERY SINGLE DAY TRUMP PROVIDES MORE PROOF THAT HE IS AN IGNORANT, SELF-ABSORBED, UNFIT, MENTALLY UNSTABLE IDIOT, AND A DEPLORABLE AND DESPICABLE HUMAN BEING.TRUMP MUST BE REMOVED FROM OFFICE FOR MENTAL INCOMPETENCE ASAP!

Donald T Rump has not done a single thing that anyone with intelligence would consider “appropriate” or “acceptable” for a President since deciding to run for office.

Every single day Trump provides more proof that he is an ignorant, self-absorbed, unfit, mentally unstable idiot, and a deplorable and despicable human being, who must be removed from office ASAP.

VERY IMPORTANT -

(1) Before contacting me with questions about how a blog post relates to your specific situation, please be aware that I do not give free tax advice to non-clients by e-mail, comment response, or phone. So don't waste your time and mine.

(2) I am winding down my tax practice, and I will not, under any circumstances, accept any new clients. Period. I am actually trying to "thin the herd".